Considering Two Plays on Rising Auto Sales

Auto production has been one of strongest performing parts of the U.S. economy over the last year and a half and annual sales levels are approaching pre-crisis levels. My favorite play in the space continues to be Ford (F), although I have a small position in General Motors (GM) as well.

Both companies are also experiencing fast growing sales in China. In addition, auto sales in Europe seem on the verge of stabilizing over the past few months after having a dismal showing over the past two years. Emerging markets while weaker lately, should show good growth over the longer term.

Auto parts manufacturers have had a good run over the last year and many are selling at or near 52-week highs. However, most of the players in the sector still have reasonable valuations and could move higher if auto sales remain on an upward trend. Here are two worth consideration.

Dana Holding (DAN) designs and manufactures driveline products, technologies, and service parts for vehicle manufacturers worldwide. Dana has been on quite the roll recently. The stock reached a record post-bankruptcy high of $21 a share last week on a solid June auto sales report and RBC Capital upgraded it to a Buy rating with a $24 price target.

More importantly, the company announced that it was raising the authorization on its stock repurchase program from $100 million to $1 billion late in June. Dana is in a position to do this because its 2008 bankruptcy greatly reduced its debt and liabilities, and the company currently has net cash on the balance sheet. Even at a record high, the stock is not expensive, as it is trading at 10x times 2014's consensus projected earnings. This consensus does not reflect the impact of the recently announced buyback increase that would retire roughly a third of DAN's float at the current stock price.

The company generates approximately 43% of its revenues from North America. It derives 25% of its revenues from Europe and the rest from Asia and South America. After being slightly down this fiscal year on the back of slow sales in Europe and in commercial vehicles, overall sales are expected to grow at 6% to 8% in fiscal 2014. The company should perform better in 2014 as these markets rebound. The company is well situated to continue to enjoy strong U.S. sales, improving performance in Europe and the buyback provides a significant tailwind as well. I expect the shares to hit $25 in the next year.

TRW Automotive (TRW) supplies automotive systems, modules and components to automotive original equipment manufacturers and related aftermarkets. TRW is more leveraged to stabilization in Europe since it derives about 43% of its revenue from the continent. This is mitigated by a slightly lower current valuation, which is just above 9x expected 2014 earnings. The company is also expected to post just below 3% sales growth this fiscal year and around 6% revenue gains in fiscal 2014.

The company has done a good job of using operating cash flow to retire debt; its debt levels stand at historical lows as a result. TRW also retired more than 3% of its float through its stock authorization program in 2012. It now has approximately $800 million on that plan to go (roughly 10% of market capitalization at the stock's current price).

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